Square Inc (NYSE:SQ) has lost quite a bit of steam lately. Interestingly enough, the company’s recent foray into the bitcoin market was not enough to help things!
Yet despite all this, it is important to keep in mind that SQ stock is still up a sizzling 170% for the year. So profit-taking is to be expected.
But what about going forward? Could SQ stock now be at attractive levels? Well, I think investors should hold off for now. Actually, the situation reminds me of the old Wall Street saying: good company, bad stock.
The Good About Square Stock
Square, which was founded in 2009, was prescient to capitalize on the mobile revolution. The company was also smart to rethink the legacy payments business model, such as by simplifying the sign-up process and providing an easy-to-understand fee structure. In the meantime, the company would go on to expand its footprint into other categories like payroll, e-commerce, home delivery, gift cards and employee management.
And yes, speaking of bitcoin, SQ has added this option to its payments app. According to InvestorPlace.com’s Luke Lango: “SQ isn’t getting into the cryptocurrency game to validate blockchain technology or support bitcoin. It’s getting into the cryptocurrency game to match booming consumer demand. The move underscores the company’s unparalleled ability to innovate in the payment processing space. That is a good thing.”
In light of all this, SQ has been able to maintain a robust growth ramp. During the latest quarter, net revenues jumped by 33% and GPV (Gross Product Volume) climbed by 31%.
All pretty good, right? Certainly. But there remain nagging issues and risks.
SQ Stock And The Problems
One of the growing risks with SQ stock is the liability exposure to the balance sheet. Keep in mind that the company is aggressively pushing lending to customers. While this is certainly a lucrative market, the focus is still on small businesses — which can be dicey. These operators are also particularly vulnerable to recessions.
It’s true that SQ does have an incredible set of analytics and data on customers. And this should greatly help with underwriting. Yet even the most sophisticated systems can be far from fool-proof. A prime example is the financial crisis, in which some of the world’s largest financial institutions nearly imploded because of models that did not work in extreme conditions.
Next, SQ’s rivals have been rethinking their own businesses, which is making them more competitive. If anything, there is always the threat of more pricing pressures. Besides, SQ’s competitors are some of the world’s best companies, like Intuit Inc. (NASDAQ:INTU) and Paypal Holdings Inc (NASDAQ:PYPL).
Bottom Line On The SQ Stock Price
But of all the risks, perhaps the most notable is the valuation. Note that SQ stock trades at 7 times sales, which is rich in light of the company’s expected growth rate.
Wall Street analysts are also expressing concerns. Here’s a sample:
- BTIG analyst Mark Palmer has worries about the competitive landscape and thinks much of the good news is already factored into SQ stock. His price target is $30.
- Cowen & Co.’s George Mihalos recently initiated coverage on SQ with a “market perform” rating and a price target of $36. While he thinks the company is becoming a valuable platform, the valuation remains at unattractive levels.
Of course, analysts are far from perfect. But when it comes to SQ stock, they have some valid points. And given the big-run up in the stock, it’s probably good to wait for a better price. After all, in just the past few weeks, SQ stock has already dropped from $49 to $36 — indicating how price sensitive the shares are.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.